Winners and Losers: US-China Trade War

Much recent literature on US-China trade relations has focused on the possibility of a trade war between the countries with the two largest GDPs in the world. New US President Donald Trump has consistently accused the Chinese of manipulating their currency, which is an outdated claim. Most conservative estimates suggest that China has spent over $1 trillion in foreign reserves to bolster the value of the renminbi. As part of his campaign rhetoric, Trump threatened a 45% tariff on all Chinese imports if the Chinese did not end this “currency manipulation.”

But what would be the Chinese response to such an imposition? Luckily, we have some insight into what such a tariff would look like. In 2009, shortly after taking office, President Barack Obama imposed a 35% tariff on Chinese tires. In response, the Chinese took a case against the US to the World Trade Organization, to no avail. Thus, China took steps to impose tariffs on several US products, leaving both countries with losses as a result. If President Trump were to impose an even higher tariff on all Chinese goods, the results could be disastrous for both countries. Chinese exports to the US have been steadily increasing, and Chinese officials see no cause for concern over the potentiality of a tariff, since the US market only accounts for about 18% of their exports. Officials say that if a trade war were to occur, US companies like Apple, which rely on inputs made more cheaply in China, would suffer much more than Chinese companies would. While the Chinese could simply replace Boeing orders with Airbus, auto and iPhone sales in the US would suffer a huge setback.

The large (and growing) trade deficit between the US and China is indicative of an unbalanced flow of goods between the two countries. Further, while Chinese exports to the US account for 18% of their total exports, Chinese goods account for 22% of all imports. A trade war would be detrimental to hundreds of US firms which rely on imports of inputs to their production processes. As we know from economic theory, increasing the cost of inputs to a production function decreases the quantity of those inputs, and thus decreases the total output a firm can produce. This would dramatically affect many companies, like Apple, which have huge fixed costs associated with the production of their product. In the long run, although the US might see some tax revenue from such high tariffs, China would likely be the winner of a trade war, as they could, with relative ease, send their exports to other countries while US companies would struggle to find alternative sources of imports.

17 Responses to Winners and Losers: US-China Trade War

President Obama’s tariff on Chinese tires is something I discussed on a comment earlier in the term. What President Trump fails to recognize is that his plans for blanket protectionist tariffs can (and likely will) backfire and cost jobs. In the case of Obama’s decisions in the Chinese tire market, it initially saved over 1,000 jobs and rose U.S. tire production; however, a study by the Peterson Institute of International Economics shows that down the road, Americans actually paid more for tires. The U.S. tire market was subjected to ascending Chinese prices (up from $31 per tire to almost $39), as well as rising domestic prices due to less competition from China. This cost Americans an extra $1.1 billion, resulting in around 3,700 retail jobs lost. However, the tire market ultimately leveled off at the conclusion of the tariff, practically rendering it an economic wash. The crucial difference in the case of Trump is the broad and comprehensive nature of a 45% blanket tariff. With the current trade deficit Mason has illustrated, Trump and the United States would be lucky to break even in the job market with such a proposal.

Such a tariff would certainly result in job losses. It’s a terrible idea, plain and simple, based purely on anti-China rhetoric. Who knows if Trump understands these concepts at all. We can be certain though that the members of his cabinet understand the consequences of igniting a trade war; let’s hope that the Trump administration keeps to their word about bolstering the economy through fiscal policy, and not make rash mistakes that hurt everyone involved.

I think a really interesting thought experiment is considering the repercussions of a Trump tariff, domestically. We already saw the deputy attorney general order the Justice Department to not follow Trump’s executive order calling for an immigration ban. If he does impose the tariff which, as you note, most of his advisers would see as a terrible idea, would they, or anyone else in the federal government, try to stop it?

Unfortunately some of his advisors seem to believe at heart that international trade is bad. Furthermore, Trump does not appear to choose those to whom he listens with much attention to whether they care about or are familiar with the costs & benefits of policy based on real-world data.

I think Mason’s point about the trade imbalance between the US and China is one of the most important parts of this post. Looking objectively at the two economies, it is clear that they are in quite different stages of economic maturity. While China is still very focused on development of manufacturing and heavy industry, the US is continuing to expand as a service-based economy. To believe that the US is going to return to a manufacturing-based model simply does not reflect the path of the US economy, and it would be very difficult to do so, let alone compete with lower-cost Chinese manufacturers. As Mason and Matt have both suggested, a trade war with China would simply result in higher prices for Americans and potentially less availability of products manufactured in China. Trump would be far better served trying to improve the US economy within the new reality of a service-based model, instead of starting a trade war and attempting to compete with US firms.

This is a good observation, but it is worth noting that, as we discussed in class yesterday, China is somewhat moving away from manufacturing and leaning more toward the service sector. This is indicative of the fact the China, like the US, is advancing in its stage of economic maturity. With Southeast Asian nations swallowing up much of the former Chinese manufacturing base, mainly due to rising labor costs in China, it will be a fascinating exercise in observation to see how China responds to its own fate mirroring that of the US over the past few decades.

I agree with Alden’s comment above concerning the differences in economic maturity between the U.S. and China. In the early 20th century manufacturing dominated the U.S. economy and as of 1990 manufacturing was the largest employer in 36 states, but as of 2014 only prevails in 7(WP). Manufacturing boosted the U.S. to its economic stronghold today, and has allowed, as of 2015, for 68.2% of our GDP to come from the private services sector (BEA). This shift, I think, can largely be attributed to China’s growing manufacturing sector, that produce goods more efficiently than the United States, albeit other production aspects as well such as automation. It’s important to remember the concept of comparative advantage in this scenario. While it may not apply to concrete goods in this scenario, it would behove the U.S. to shift focus towards the service sector, in which we currently lead. It will be interesting to observe, however, if China’s manufacturing economy makes the transition into a service economy, much like the U.S. did, later on down the road.

An interesting question is why we have the comparative advantage in the service industry, and they have comparative advantage in the manufacturing sector. Can we attribute the disparity to differences in our education system? If so, it seems the jobs President Trump promises to bring back are jobs we may not want anyway, since our system of education is (supposedly) preparing people for jobs that do not require the same skill set as manufacturing jobs.

This is I think another example of President Trump playing checkers when he should be playing chess. He is only thinking about the short term move, not the implications and results on the actions he’s taking. Yes, imposing tariffs would “stick it” to the Chinese but I do not think he has thought about the disastrous implications it would have over his mainly middle class voting bass. I also believe that this is mostly talk and will not be put into place. President Trump has been continuously rolling back regulation, I can’t see him imposing such a drastic trade measure.

I heard a speaker a few years ago discuss how a trade war of any kind between the United States and the Chinese would be mutually assured economic destruction. While at the time I certainly didn’t know enough to agree, the more I read about this topic and the further we get into class, I’m sure of it. Again, like the Cold War, any economic move that seems the least bit aggressive, is sure to produce retaliation. While on one hand “fixing” the trade balance would decrease the possibility of a really nasty trade war, the process of slowly drawing back from dependance on Chinese could produce a ripple effect and escalate the situation. It’s almost damned if you do, damned if you don’t. I think the best course of action is to wait it out for the foreseeable future, particularly with China’s economic slow down to see if there are gradual steps to reduce some of this economic tension.

Yeah, I think this trade war concept between Trump and China is all talk. Companies may be more powerful than governments in the US, and these companies certainly do not want to see higher costs. Plus, it seems that Trump is already backing off on his Chinese threats by choosing to recognize the “One China” policy despite his campaign actions stating he will not honor it.

I agree with many of the above comments, and with your comments, that a US China trade war only stands to costs both countries jobs. Even the simplest models of international trade, like the model of comparative advantage often presented in ECON 101, demonstrate that trade is almost invariably beneficial to both parties. I wonder if being caught up in the political rhetoric of China “stealing American jobs” is preventing US politicians from realizing how trade with China lowers prices in both countries and opens to doorway for US specialization in higher value added production.

It is clear that most agree that if Trump’s combative stance rhetoric on China were put into practice it would be a damaging development for the American economy. The President’s claims that he can bring back manufacturing jobs supposedly “stolen” by China is a canard. The fact is that the US economy lacks the demand for such jobs and has been increasingly service-oriented over the last few decades. China’s growth in manufacturing is in large part due to a late start in development and a massive labor force. These two characteristics mark a clear Chinese advantage over the US in terms of a manufacturing economy. The President’s focus on reviving American manufacturing relative to China is hampered simple comparative advantage. It seems as if Trump is merely interested in inflicting harm on the Chinese economy regardless of the damage it could cause to the US economy.

There is one fundamental issue that none of you picked up: accepting bilateral trade as economically meaningful. If we’re running trade deficits with everyone, then maybe the cause does not lie in Country X or Country Y. Trade is global not bilateral. If domestic demand is strong while we approach “full employment” under one or another definition, then we will run a global trade deficit, and for every country with which we run a surplus, we’ve then got an even bigger deficit elsewhere.

Second, trade is increasingly “vertical” with different stages of production (iPhone components) being made in many different countries, design and software and brand strategy in the US [the most profitable production steps], while China only does assembly. Trade statistics don’t reflect that, they reflect the wholesale price of the iPhones exported to the US. For example, a quick estimate is that 40% of the value of Mexican exports to the US is composed of components imported from the US.

Even without retaliation, the impact on the US would prove far larger than China hardliners believe – assuming that their beliefs have an empirical component. They may be in fact true believers in the power of their own rhetoric, and you can’t “disprove” rhetoric, can you? Twitter is not a medium you turn to if you care about facts and logical arguments, it’s about emotions, not economics.